Friday, April 30, 2010

ABC News, a unit of the Walt Disney Company, largely completed one of the most drastic rounds of budget cutbacks at a television news operation in decades, affecting roughly a quarter of the staff. The cutbacks promise to change ABC both on- and off-camera...More interviews will happen via Skype, rather than an expensive satellite truck. Prime-time shows will rely more heavily on freelance employees. More assignments will be made from a centralized office in New York, rather than by far-flung bureaus, because some of those bureaus have been severely downsized.

Obviuosly, we are talking about a secular downsizing here rather than a cyclical one. These jobs aren't coming back.

Eighty years ago, the British colonial government of India imposed strict controls on the manufacturing and sale of salt, inspiring Gandhi and thousands of others to participate in the salt satyagraha. Now, it appears that salt has once again become an implement of control – this time, to be used by the American government against the people.

This article from the Washington Post, citing FDA sources who would only speak anonymously, claimed that the agency is considering a program to reduce the salt content of all processed foods in America. A report from the Institute of Medicine and a press release from the FDA confirmed the rumor. The FDA’s press release emphasized that while the agency has not yet begun to regulate the amount of salt in foods, it will "thoroughly review the recommendations of the IOM report" and make plans to "work with other federal agencies, public health and consumer groups, and the food industry to support the reduction of sodium levels in the food supply."

The Institute of Medicine report revealed more about the mechanisms of how the policy would be implemented: "the goal is to slowly, over time, reduce the sodium content of the food supply in a way that goes unnoticed by most consumers." A few months earlier, this article in the New England Journal of Medicine had promoted the idea of using government regulations to achieve population-wide reductions in dietary salt intake, claiming that such regulations would prevent thousands of heart attacks and strokes, which are caused by hypertension (high blood pressure), and would save up to 92,000 lives per year in the US.It almost seems surreal that a government agency would begin to scrutinize the list of ingredients in every single food product in America and then "work with" – that is, force – their manufacturers to ensure that incrementally less salt was added to the foods over time. (What would this agency be called, the Department of HomeBland Security?) Yet, this is the reality with which we are faced.

Just about everything that people think they know about labor unions and wage rates is wrong.

The standard tale that practically every student hears over the course of his education is that before the emergence of labor unions, American workers were terribly exploited and their wages were consistently falling. The improvement in labor's condition was due entirely or at least in large part to labor unionism and favorable federal legislation. In the absence of these, it is widely assumed, people would still be working 80-hour weeks and children would still be working in mines.

This oft-heard tale is, however, almost entirely false, and those parts of it that are true (the low standard of living that people enjoyed in the nineteenth century, for example) are true for reasons other than those alleged by pro-union historians, who see in them only confirmation of their prejudices against the market economy.

As late as the 1920s, labor law in America was based on the following considerations.

Freedom of contract and association were essential principles. A laborer was perfectly free to reject any offer of compensation that an employer might make to him, and an employer was likewise entitled to reject any offer made by a laborer. An employee was free to withhold his labor services if unsatisfied with his employer's terms; likewise, a group of laborers jointly exercising this individual right were permitted to do so. No one, however, was allowed to prevent individuals who wished to work from exercising their right to do so.

Strikers – like anyone else – were forbidden to interfere with consumers' right to shop where they liked. And strikes could not obstruct suppliers from making deliveries, since to do so would again violate the rights of others. Finally, since the employer's plant was private property, the employer had the absolute right to decide who would be permitted to enter, and complete strangers who wished to enter for the purpose of agitating his employees could be lawfully excluded altogether.

This common-sense legal approach to labor unionism began to give way with the Norris-La Guardia Act, signed by Herbert Hoover in 1932. The legislation made "yellow dog" contracts – in which an employee could be required to promise to refrain from union activity as a condition of employment – unenforceable in the courts. The Act also exempted labor unions from prosecution under the Sherman Antitrust Act. Although the Sherman Act should certainly have been (and still should be) repealed, if there were ever an institution guilty of "restraint of trade" it was labor unions, which not only withheld their own labor but which also used intimidation and force to keep down non-union competition. They would henceforth be exempt from behavior that the law deemed criminal in any other context.
Read the rest here.

The latest GDP numbers are out. They show a 3.2% growth in Q1. Examine the numbers in detail and you have to reach the conclusion that this "recovery" is a very manipulated and distorted recovery.

A sizable part of the gains came from strength in economic performance by the Wall Street elite and the health industry, which of course is where the government has been playing and funneling money to its favored groups.

Much of the rest came from inventory adjustments, which as Peter Morici has pointed out, "...in the arcane world of GDP accounting, ending depletion of inventories adds to growth...Adjustments to inventories accounted for 1.6 percentage points of growth."

Other small pockets of growth included appliance sales where government rebate programs have stimulated sales. But the rebate money allows others to buy new washing machines using money coming from your taxes money (Or Fed money inflation). Home sales were up because of the $8,000 first time home buyers tax credit--more short-term manipulation. The program ends at the end of this month.

Some "recovery."

Morici is spot on when he writes, "This recovery is decidedly anti middle class...Backing out the inventory adjustments, real GDP increased about $162 billion since the second quarter of 2009, when the economy bottomed out. Wall Street for 2009 paid out bonuses of nearly $150 billion on profits twice that amount."

Is it any wonder that the other economic news out today is that the top 1% of Americans increased their share of all national wealth to 35.6% in 2009, up from 34.6% in 2007?

$2 trillion dollars patches up the problem through 2013. Total current IMF bailout capacity: $700 billion. A bit short.

Further, keep in mind that these countries are black holes for money. $2 trillion would only resolve the current money needs. There is no indication at all that any of these countries have any plan to resolve their continuing crises in any way other than counting on bailout money.

Here's a Bank America table that details the debt coming due and the deficits, for the next three years, on a country-by-country basis, for the PIIGS:

Moody’s Investors Service has today downgraded the bank financial strength ratings as well as the deposit and debt ratings of nine Greek banks to reflect their weakening stand-alone financial strength and the anticipated additional pressures stemming from the country’s challenged economic prospects, Moody's announced.

Spain's National Statistics Institute said Friday that first-quarter unemployment rose to 20.05% from 18.83% in the fourth quarter of last year.

This is part of the problem that makes Spain the Big Daddy in the PIIGS crisis. Not only do they have huge debts coming due in July, but the economic wreck that Spain is means that there is nowhere to squeeze to help bring future deficits down.

The Greeks may not like it, and it certainly isn't right, but the government has room to squeeze and raise taxes , but how are you going to raise taxes on a country with 20% unemployment, and in the middle of a housing price collapse?

The remarkable comments by Bill Clinton that the current financial problems can be traced back to the U.S. leaving the gold standard, and also his suggestion that the SEC charges against Goldman Sachs look suspicious, indicate that insiders have lost control of Clinton.

I discussed Clinton with a major insider who had just been with Clinton the day before, he told me that he knew "for a fact that Clinton has no support team around him." Translation: Now that he is out of power, Clinton has ditched his controls and is thinking for himself. It is really not hard to believe that the always intellectually curious Clinton picked up Ron Paul's book, End the Fed, which contains a discussion of the gold standard, to see what was behind the Paul movement, and it convinced him

Thursday, April 29, 2010

The current EuroZone crisis is fast approaching a monster size that will be too0 big to solve, or at least solve in a manner that &nbspsp; the founders of the EU would like it to be worked out. i.e. a via global bailout.

There are three possible scenarios. First, the ECB may be allowed to really let loose with “liquidity” – and somehow buy up all the bonds of troubled eurozone nations. But this is exactly the process that always and everywhere brings about high inflation. The Germans would fight hard against such a policy, although it would prevent default.

Second, officials still hope that bond yields for weaker governments widen but then stabilize. This is bad news for troubled eurozone countries, but they manage to avoid default. The rest of the world grows by enough to pull up even the European “Club Med + Ireland”. Call this the trickle down scenario or just a miracle.

Most likely, the situation is about to turn much worse and a third scenario unfolds. The nightmare for Europe is not at this point about Greece or Portugal – it is all about Italian and Spanish bond yields. This week those yields are rising quickly from low levels, while German yields are falling – so this spread is widening sharply. The yields for Spain – for example – are rising because hitherto inattentive investors, who always thought these bonds were nearly as safe as cash, suddenly realize there are reasonable scenarios where those bonds could fall sharply in value or even possibly default. Given that Spain has 20% unemployment, an uncompetitive exchange rate, a great deal of public debt, and a reported government deficit of 11.2 percent (compared with headline numbers for Greece at 13.6 percent and Portugal at 9.4 percent), everyone now asks: Does a 5% yield on Spain’s ten year bonds justify the risk? The market is increasingly taking the view that the answer is no, at least for now. So, we can anticipate Spanish (and Italian) yields will keep rising. In turn, this causes other asset prices to fall in those nations, thus worsening their banking systems, and hence leading to credit contraction and capital flight. It is a dismal prognosis.

Then it gets worse. As rates rise, traditional investors in euro zone bonds, which are pension funds and commercial banks, will refuse to take more. There will be no buyers in the market and governments will not be able to roll over debts. We saw the first glimpse of this on Tuesday, when both Spanish and Irish short term debt auctions virtually failed. Once this happens more broadly, the problem will be too big for even Mr. Trichet or Ms. Merkel to solve. The euro zone will be at risk of massive collapse.

After this solid analysis, Johnson then makes the astounding call for a trillion dollar bailout of the PIIGS.This magical sum would be paid for by citizens of this planet. (Simon is apparently taking Stephen Hawkings advice not to talk to aliens).

Bottom Line: The EuroZone Crisis is too big to be solved by bailouts without huge pain inflicted, via taxation and/or inflation, on citizens of this planet who had nothing to do with creating the crisis.

Here's the only realeconomik way out that makes sense.

The EU should be split up from it's current form. It should simply become a trade organization (Think NAFTA). Each country reverts back to its own national currency. Each country then solves its own debt problem. If a country wants to print their way out of the crisis, and suffer the inflationary consequences, good luck to them.

The best solution, under this scenario, would be for each of the PIIGS to restructure their debt, i.e. default. The lossess would be limited to the debt holders, largely European banks. Each country would then have to decide whether or not to bailout the the banks in their own country that would come under pressure. The recommended solution would be to allow them to fail, but each country should be allowed to handle this in their own way.

For the countries that make the wise choice of default, without a bailout for the banks, they would find themselves in a situation with a strong currency and the potential for putting their financial house in order, as union leaders could no longer argue that the budget cuts were only a payoff to global banksters.

There are no easy solutions, but unified global action is oppressive, potentially inflationary, and only a stop gap measure. Compartmentalizing the problem, country by country, provides incentives for each country to put its own financial house in order. But most importantly, it builds firewalls around the countries that refuse to bring their financial houses in order, so that crises do not spread in terms of bailout demands. Therefore, incentive turns not to countries to provide bailouts, but for countries in trouble to adopt sounder fiscal practices.

Retailers plan to shut their stores on May 5, joining a strike organized by the GSEE, another union, the country’s largest.

Sixty-five percent of Greek voters polled by researcher Alco for the Proto Thema newspaper last week said Papandreou must reject any measures that lead to more wage and pension cuts, according to Bloomberg.

H.L Mencken once defined Puritan reformers as those who have "a terrible, pervasive fear that someone, somewhere, is having fun."

You can find of a lot of these busy bodies on college campuses. The latest is a University of Iowa professor who looks down on the fact that money is being waged on whether Lloyd Blankfein will survive the year as CEO at Goldman Sachs.

Betting on Goldman isn’t much different, said George R. Neumann, a University of Iowa professor of economics who in 1988 invented the Iowa Political Stock Market, the predecessor to the still-popular Iowa Electronic Markets.

Professor Neumann’s online futures market serves primarily as a teaching tool, while Intrade is a profit-making exchange that charges 5 cents a contract.

“I don’t know what the economic gain is,” Professor Neumann said of the betting on Goldman, “and it’s in bad taste.”

Puhleezee. As taxpayers, we coughed over billions to the scamming Goldman, at least we can have a little fun betting on his deaprture from Goldman. And the economic gain is huge psychic gain, something that wound up types like Neumann never consider because it doesn't fit into their uptight equations.

I have been quite busy on a number of other projects (Including spending time working on more changes and updates to the EPJ page!),so I haven't had a chance to respond. I should be freed up by this weekend at which time I plan to get back to all of you.

Europe's current bailout plan for Greece "is not going to work" because "Greece is nearly insolvent," Roubini told CNBC Wednesday.

"A restructuring of its debt [i.e. default] is going to be necessary," said Roubini.

A collapse of the Greek economy could have domino effect among other weak eurozone countries—including Portugal, Spain, Italy and Ireland, he said.

“Suppose you have a disorderly collapse of Greece, two things will happen," he added. "Financial institutions holding Greek debt—mostly European—will have massive losses. Secondly, a contagion from Greece to Portugal to Spain to Italy to Ireland will have a domino effect."

Eventually, debt increases and risk aversion is going to drive down the asset prices globally, as it happened yesterday and today.”

...his columns have quickly become "must reads" for entrepreneurs and executives who grasp that mathematics is now the "lingua franca" of serious business analysis. There is no better English-language explicator of complex quantitative concepts than Steven Strogatz. His work is a model for how mathematics needs to be popularized

Speculation that the EU will provide Greece the funds needed to delay default are pushing Greek stocks much higher.

The big question, though, remains, "If Greece is patched, does that mean Portugal, Ireland, Italy and Spain will be funneled funds?" Who is going to patch Greece, next quarter? Who is going to patch Greece next year? Hey, doesn't it, at some point, get expensive (or inflationary) to do this? Is Germany really up for all this?

Word from NyPo is that "Goldman Sachs may soon settle its fraud case with the SEC, opting to end the legal fight rather than endure a repeat of the public flogging it received Tuesday in Washington."

If this in fact is true, it indicates another blunder that will paint Wall Street in a bad light when it is really a Goldman Sachs problem, and not a Wall Street problem.

Further, from a legal perspective any securities lawyer (outside of the SEC) will tell you that the SEC has no case.

If Goldman settles now, it indicates another tactical error by Goldman. They should have foreseen the negative publicity that the charges would bring and have had a full court press public relations campaign, with people who know how to present these things, in every nook and cranny of the news media. That they didn't, and still don't, points to a public relations failure of the first order.

Outside of strategically leaking voicemails to the media, they haven't done anything right. And the communications disaster is not something that started with the SEC suit. It has been on-going from the time MSM got wind of the fact that former-Goldman people were crawling all over the U.S. government and governments around the world. This should have been presented and promoted by Goldman as executives leaving big money to "serve" the world, never to return to Goldman big money. "We give Goldman people, who are very smart and talented people, the opportunity to make extremely good money, so that ultimately money does not become a concern and they can use that freedom after they leave Goldman to advance their pet projects, be it advancing freedom, intellectual curiosities, whatever."

That this theme was not promoted is at the core of Goldman's problem. To the man on the street, Goldman is just a bunch of evil bastards, doing evil 24 hours a day. And while Goldman does do enough evil that were the Goldman perpetrators to confess, it would keep a bunch of pedophile priests so occupied in confessionals that they wouldn't have time for the kids, Goldman also does do some fundamental Wall Street work that sadly is beginning to be associated with Goldman evil doing, when it is nothing of the type.

The best thing that could happen for Wall Street is for a volcano to erupt under Goldman's headquarters and the entire bunch of them turn into particles of ash that perhaps delay air flights over America for a week.

A less desirable, though next best alternative, would be for Lloyd Blankfein and Goldman PR chief Lucas van Praag be bounced from Goldman, and replaced by people who understand what Wall Street is about and want to make money the old fashion way by earning it and not by playing footsie with the government to the degree that crooked politicians are embarrassed to be seen in their presence.

Former Treasury Secretary, Hank Paulson, who shoveled hundreds of billions of dollars to Wall Street's elite during the financial crisis, has put his Washington D.C. house up for sale. He bought it at what would have been the peak in the housing market in 2006 for $4.3 million and has it up for sale for $4.6 million.
WSJ has a slideshow of the house here.

BLEG: Slide 3 shows Paulson's bedroom with an extensive book collection. If anyone has the skilz to blow that slide up so that the book titles are readable, please let me know. I sure would like to know what books Paulson is reading while he is in bed with the missus.

Wednesday, April 28, 2010

Angela Merkel, Germany's chancellor, promised swift action to end the crisis, but said it was a mistake for Greece to have been allowed to join the single currency. "In 2000 we had a situation when we were confronted with the question of whether Greece should be able to join the eurozone," she said. "It turned out that the decision [in favour] may not have been scrutinised closely enough."

It continues to be hard to believe that Germany will be anywhere around when it comes time to pull out a checkbook to support a bailout Greece.

Right now it appears that EU members have ditched their fire trucks, and are walking to the fire, while making sure they honor all crosswalk signs.

According to the Guardian, interest rates on two-year Greek bonds, yesterday, climbed as high as 38% at one point, yet the Euro zone members won't be meeting until May 10th or 11th. True, the big day for Greece is May 19th when they have to pay off 8.5 billion in euro debt, but a May 11 meeting leaves little time to resolve differences before a life saving check must be delivered to the Greeks.

What the time lag and slow pace does do is allow the speculation and fears spread to the other PIIGS. Germany certainly has no obligation to bail out any of the PIIGS, and it is certainly proving that.

Examining the default option, one can state that the various PIIGS could default and the EU could still remain intact, however, there may be advantages at this point (like the ability to print money) for some, or all, of the PIIGS to default and leave the EU.
Stay tuned.

People in the know, who travel in the top echelons of both Washington and Wall Street, tell me that the views of what went down at the Goldman hearings are diametrically opposite within the two groups.

Wall Street people think the Goldman witnesses held their ground explaining how markets function, while the D.C crowd views the Goldman crowd as being a bunch of unethical crooks that were exposed by the questioning of the Senators.

The problem for Goldman, Wall Street and capitalism is that the man on the street is thinking like the D.C crowd, that there is something inherently evil in the way Goldman and other brokers conduct market making business. This is likely to lead to some very bad legislation that will hinder the capital raising function on Wall Street.
Main Street hates Goldman Sachs and the political crowd is using this anger by posing as doers. It will result in laws
.

File this under unexpected. Former President Bill Clinton blames the current financial crisis on the U.S. leaving the gold standard.

During an interview conducted at the Peterson Institute by Bob Schaeffer, Clinton sounded like a hardcore gold bug as he said that the problems in the economy started when the U.S. went off the gold standard.

He then hedged a bit and justified the U.S. leaving the gold standard for "economic management" reasons.

Those economic management reasons were, of course, that the U.S. had printed so many dollars at the then price of gold ($35 per ounce) that the U.S. did not have enough gold to back up all the money it printed. But Clinton's statement clearly implies that he understands that gold is a check on out of control government printing of money.

Do you think Bill and Hillary have a few gold coins tucked away?

On another note, during the same interview, Democrat Clinton makes clear that he doesn't think the SEC has a case against Goldman Sachs. "I read a lot of material on this," he says.

The first roughly two minutes of this clip are priceless. At 1:58 get a load of Bob Schaeffer's face, just after Clinton says leaving the gold standard was the problem. Schaeffer is an insider who was probably taught to hate gold when he was still in diapers. Clinton's comments were certainly a shock to him.It's tough when an insider breaks the rules and tells the truth.

The Hungarian currency, the forint, has been under pressure the last couple of days as comments from the country’s premier-in-waiting raised worries over its fiscal position.

Viktor Orban, Hungary’s premier-in-waiting, stated yesterday that Hungary’s fiscal deficit is going to be higher than the target agreed with the IMF. It appears he's not talking a percent or two, but double digit higher.

The difference between in Hungary and the PIIGS is significant. The PIIGS are all members of the EU, so they do not have their own currency by which they can print themselves out of the debt crisis. Hungary, not being a member of the EU, has its own currency. Thus pressure in Hungary is going to be on its currency rather than its debt. It can just print more forint to pay its debt. This, naturally, solves its debt problem, but creates even greater problems down the road, a distorted capital structure and increasing inflation.

Ambrose Evans-Pritchard is reporting that "the ECB may no longer have any choice [other than to print money and buy up the bonds of the PIIGS ]. There is a growing view that nothing short of a monetary blitz — or 'shock and awe' on the bonds markets — can halt the spiral under way."

For me, it is hard to see this happening. Germany, a key player, would most assuredly be against it, for the obvious inflationary repercussions. Any such move would send the euro into a nosedive that it quite possibly would never recover from. There are likely players in the EU that would like to see the nuke money printing button pushed, but Germany most likely has a strong enough influence to stop this.

Our view of Germany's posture right now is that they will continue to nod in favor of a Greek direct bailout--as long as the bail out continues to be "a few weeks down the road," rather than today.

It's a long shot. I continue to believe that Geithner has powerful sponsors and that his farther is/was likely a high ranking CIA operative when he was in charge of micro-loans in Asia for the Ford Foundation (At the same time that President Obama's mother started a micro-loan organization in Indonesia)

But, Neil Barofsky, head of the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), is hinting their may be a case.

Barofsky says the question of whether the New York Fed engaged in coverup will result in some sort of action.

“We’re either going to have criminal or civil charges against individuals or we’re going to have a report,” Barofsky told Bloomberg. “This is too important for us not to share our findings.”

A Bloomberg profile makes Barofsky out to be a tough S.O. B. But if Geithner has the kind of protection I suspect, it will be tough for Barofsky to bring anything but a slap on the wrist.

Still it is interesting that Barofsky may be a Tea Party sympathizer. He told Bloomberg:

There’s a reason there are Tea Partiers out there, and when you look at it, anger at the bailout is one of the first things they talk about. This Treasury Department and the previous Treasury Department bear some of the responsibility for not being straightforward with the American people.

Nouriel Roubini is at the Milken Conference and Felix Salomon reports in on Roubini's panel comments:

Nouriel, of course, takes that kind of thinking to its logical conclusion, and kicked off the panel by announcing that it was just in time: “in a few days,” he said, “there might not be a eurozone for us to discuss.” There’s no way that Greece can implement the 10% spending cut it needs to do in order to stop its debt spiraling out of control at current interest rates — and even if it did, the economic effects would be disastrous.

Nouriel’s base case, then, is Argentina 2001: after all, Greece has a much higher debt-to-GDP ratio, much higher deficit-to-GDP ratio, and much higher current-account deficit than Argentina had back then. And if that’s the base case, there’s no way that Greek debt should be trading anywhere near its current levels.

It was designed to be a scolding of Goldman Sachs' brass in search of assigning blame for the mortgage crisis -- but it ended up revealing how little Congress understands about the gold-plated firm's business.
Some of Goldman's best and brightest minds yesterday faced a withering verbal assault from lawmakers who often betrayed their lack of understanding of Goldman's role in many of the transactions now drawing fire.

At one point, Michigan Sen. Carl Levin, chairman of the Senate Subcommittee on Permanent Investigations, accused Goldman of being "rife with conflicts of interest," and declared the firm wasn't worthy of trust.

While the senators repeatedly argued that Goldman created securities solely for the purpose of betting against them, Goldman CEO Lloyd Blankfein and others fended off those charges by trying to explain that investors, all of whoMany of the issues that were sticking points for members of the panel, appeared to be rooted in different interpretations of Goldman's role as a so-called "market maker," or an entity that links buyers and sellers.

m are savvy enough to understand the bank's role, weren't interested in whether Goldman was betting for or against a security it created.

"You keep using the word betting 'against,'" Blankfein exclaimed at one point to Levin. "We are principals."
"The nature of the principal business and market making is that we are the other side of what our client wants to do," he said. "And in the context of market making, that is not a conflict. I don't think our clients care or should care [if Goldman is taking a short position]," he added.

Earlier in the day, several members of the subcommittee tussled with former mortgage-trading desk boss Dan Sparks, who argued Goldman was under no obligation to disclose its position with a security it was selling because that position might change day to day.

"Should you have told that client you were going short, if you were?" Levin demanded of Sparks.

"Currently, that is not an obligation," Sparks said. "I think it would create a number of issues because those positions change a lot [and] you don't know what those positions are [at any given moment]."

But the misunderstandings didn't stop there. At one point, a number of senators declared that Goldman had a fiduciary responsibility to be completely transparent about its activities with each security, even though that responsibility doesn't exist with market makers.

Almost weekly, we hear new announcements from the the IMF, the EU, the ECB of money they are supposedly providing to Greece. The details are always sketchy (to be filled in later) and the money never seems to be sent, but sometimes it does spike the market upwards for a few hours (which helps the banks sell off a little more Greek debt), so I am going to do my part:

I hereby announce that I am going to provide Greece with a trillion dollar bailout. And in the spirit of the Ben Bernanke school of money printing, the interest rate will be zero. In fact, under my GARP plan (Greek Assistance and Rejuvenation Program), the Greeks don't even have to pay the money back, ever.. This means that European stock markets can now spike up, that the Greeks no longer have to strike--and in fact, they don't even have to work once my money hits.

As for when I will send the money, as soon as I find my damn pen so I can write out the check. I know it's around here somewhere.

Goldman Sachs CEO Lloyd Blankfein's comments before the Senate’s Permanent Subcommittee on Investigations was spot on as far as accurately explaining the role that Goldman plays in the financial arena (when it isn't raping American taxpayers through shady bailouts, see my update), but Lloyd just doesn't have the EPJ ability to drive home a point in a manner that people won't forget.

Blankfein accurately pointed out that in its money management business the firm has a fiduciary ability to do the best it can as far as picking assets that will perform well for a client, but that no such fiduciary ability exists in its role as a market maker. The Senators didn't seem to get this point, and regularly brought up the "conflicts of interest" that Goldman was supposedly facing as a market maker. What Blankfein should have pointed out is that the Senators were headed toward a solution that would "freeze markets" and "kill off a part of capitalism."

Here's what I mean. On any trade there are always two sides, a buyer and a seller. As a market maker what Goldman is doing is providing a market for a client who wants to buy or sell something. By providing this market, Goldman either has to find someone else for the other side of the trade or take the other side themselves. The Senators appeared not to get the fact that in its market maker role Goldman is not providing advice. Thus, there is no conflict of interest. (Remember this is not the money management side of their business). If I have done my own research and want to buy 100 shares of Google, I really don't care what Goldman Sachs thinks about Google. If Goldman Sachs is willing to sell the shares by shorting them or by finding a willing seller, I really don't care, if I am just using Goldman as a market maker.

To the Senators, this seemed to be a conflict if Goldman thought Google was going down in price and they sold Google too me anyway. But if I am going to Goldman solely for their role as a superior market maker (not their opinion), think of the madness I would have to go through, for no reason, if I could only use their market making skills when they were bullish on Google. If I wanted to buy some Google stock weekly and they suddenly turned bearish, then I would have to find a bullish market maker. Then if that market maker turned bearish, they wouldn't be able to sell me Google stock any more and I would have to find another market maker that was bullish. And it could go on and on bouncing between market makers to find one that agreed with me even though I was relying on my own research and wanted a broker for market making skills, not research. A rule requiring market makers to be in sync with their clients would freeze up markets and make executions much more difficult because a market maker wouldn't be able to short the stock to me (i.e.be on the other side of the trade.). He would have to find someone through a bearish market maker (not directly) that wanted to sell the stock. These would all be major complications that would be inflicted on trades that have nothing to do with the service a market maker is valued for, that is trade executions. .

A further problem the Senators seemed to have was that Goldman doesn't routinely disclose who is on the other side of a trade. But think about this. Say Warren Buffett wants to buy a stock. Does it really make sense that Buffett's broker has to disclose that it is Buffett that wants to buy the stock? Can you imagine the price jump in stocks when word got out before a trade that Buffett was buying a stock. How is this fair to Buffett, who is using his own skill and research? It would create a huge disincentive for him to continue to discover great opportunities, if he is forced to reveal what he is buying in advance. That's why you rarely know who is on the other side of a trade.

The proposals that the Senators are hinting at, a proposal requiring disclosure of who is on the other side of a trade and a proposal that trades could only be executed by market makers who are in sync with an investor's thinking, would freeze up markets and kill off an important part of capitalism.

The Senators in their posturing and posing have no idea what the hell they are talking about and would be simply be driving a part of the money raising, capital allocation sectors of the economy off a cliff.

Goldman continues with this amazing new idea to leak Lloyd Blankfein's emails. I wonder where they got that idea from? Here's the latest leak via WSJ:

This is Lloyd on [Tuesday evening] in Washington, DC.

[Earlier today], I along with David Viniar, Craig Broderick and several other current and former Goldman Sachs professionals testified before the US Senate’s Permanent Subcommittee on Investigations.

As anticipated, the questioning during the hearing was rigorous, but we tried to remain focused on providing a complete context of our business, how we manage our risk, and the value we provide for our clients and to the broader system. In those instances where the subcommittee raised questions about ethics, we tried to convey the seriousness with which we adhere to the rules and regulations that govern our business, as well as the letter and spirit of our own Business Principles.

In the totality of our testimony, I hope we made clear the confidence we have in all of you - the people of Goldman Sachs - especially your commitment to integrity, and your service to our clients.
Let me remind you that we should anticipate continued external focus on Goldman Sachs for the foreseeable future. Please do not let this distract you from your daily responsibilities.

I am very grateful to our colleagues, former and current, for the preparation that went into their testimonies and for the seriousness with which they approached the hearing.

As we hope we made clear [today], we will continue our efforts to make clear to legislators and regulators around the globe that we take our responsibilities very seriously. We will do everything we can to support bipartisan reforms that restore confidence and integrity to the capital markets.

Tuesday, April 27, 2010

On Wednesday afternoon, Treasury Secretary Geithner and Education Secretary Duncan will host an event at Treasury to recognize select high-scoring students in the National Financial Capability Challenge. The Challenge, which was unveiled in December 2009 by Secretary Geithner and Secretary Duncan, is designed to increase the financial knowledge and capability of high school aged youth across the United States. At the event, Geithner will discuss the need to complement financial reforms that will set and enforce clear rules across the financial marketplace with efforts like the Challenge to improve the economic and financial education of all Americans, especially the young.

This the only public event on the Treasury Secretary's schedule for Wednesday.

Earlier this evening, I had a conversation with a woman who lived through the great Yugoslavian inflation.

Given the debt situation here in the U.S., hyper-inflation can certainly not be ruled out as a possibility. Her comments on how she survived the hyper-inflation, and what it was like might become valuable.

She said, of course, that once she got paid, she spent the money immediately, as in a week the value of the currency would be half. "It was a lot of paper," she said.

She said you quickly learned to buy things with credit cards. If you bought some furniture, you put it on the credit card and by the time it came time to pay the credit cad bill, what it cost you for the furniture was now what it cost to buy a pack of cigarettes, because of the quick devaluation of the currency. Since wages climb up roughly as fast as other prices, to pay off the credit debt becomes a minor cost.

She said you learn to drag out and not pay your utility bills, like the telephone and electric bills, until the last minute as the currency would have depreciated so fast that the bills become inconsequential expenses.

She said everyone lived poorly except for those who had foreign currency or gold. She said if you had access to even only ten German marks per month you could live like a king because everyone valued anything that offered price stability.

The woman lives in the U.S. now and she says she never wants to live through that again. She says she now divides her savings into three parts. She puts a third into the dollar, a third into the euro and a third into gold.

The abuse by government of emails has to stop. I'm pretty much convinced that you can convict anyone of a criminal act, if you read enough of a person's emails. There have just been too many cases of governments demanding thousands of emails, where they eventually end up cherry picking a few that they release to the public, to dirty a jury pool for an upcoming show trial .

The latest evidence of this is the "show hearing" of Senator Carl Levin's Permanent Committee on Investigations. The hearings of Goldman Sachs activities during the financial crisis should chill freedom lovers everywhere. Goldman Sachs was forced to turn over some two million documents to the committee. In those documents, the committee found roughly five emails that they misinterpreted in a negative fashion. The emails were explained by the writers of them, once an opportunity during testimony was provided to put context to the emails. But, the damage was done. The released emails by the congressional committee, and similar distorting emails by a somewhat parallel bogus SEC fraud charge,, grabbed the headlines, days before. I have to think many corporate execs watching the hearings thought to themselves, "Boy, I better watch what I write in emails so that I don't put something down that can be misinterpreted." And so, a kind of self censorship takes place. Execs will think twice about what they write, and simply will use email less often to express themselves.

One of the evils of the old Soviet Union was the possibility that you could be watched, spied upon or taped, at anytime. This causes people to act differently than they normally would. Indeed, I believe it kills part of a person. Under such circumstances, there is a constant monitoring by you of your own acts. Spontaneity goes out the window. This is no way to live. The ability of government regulatory bodies to demand to read our emails introduces this Soviet style chilling effect to our lives.

Quite simply private correspondence is at the heart of freedom, no one should have to think twice about whether some government authority will at some future date demand copies of a person's emails. Correspondence is an extension of our minds and our souls, to others. If we are not free to correspond without the threat that some regulatory body may look at such emails in the future, people will start hedging on what they write. They will fear an email getting into the wrong hands. How are we to then know what others really think, unless we meet them in some dark ally and whisper? I propose that The Relief From Whispering Act ban the ability of government agencies to use and acquire emails for any reason at any time.

Only the person writing an email, or the recipient, should have the right to introduce an email in a court proceeding. Let's bring back life, spontaniety and freedom to all emails, and ban government snoopers from getting anywhere near them.

The full day of questioning of Goldman Sachs employees and former-employees by Senator Carl Levin's Permanent Committee on Investigations finally ended at 8:42 ET. The final witness was Goldman Sachs CEO Lloyd Blankfein

Despite sometimes tough questions and sometimes confused questions, Blankfein clearly won the battle. He patiently answered the questions, refused to be intimidated and tried to get across what it means to be a market maker, and what Goldman's business is really all about

The video of this full day of testimony could be turned into a college course (with the right teacher). You have Senators with their anger, fury, posing and "average man's" confusion about market making. The video
starts off with the relatively young mortgage traders who clearly have trouble handling the questioning of the older seasoned but confused Senators, and ends with the seasoned Blankfein handling the same questions much more smoothly.

If you have the time, watch the full hearing. And keep in mind that Blankfein isn't throwing up smoke. All of Wall Street sees things the way Blankfein is explaining them.

Update: I should add that the one point where I am suspiciuos of Blankfein's testimony is when he discussed the AIG bailout. He claimed that the Goldman only receieved, net, $2.5 billion from the government (via AIG) that would have othewise be provided by insurance. The other $10 billion that Goldman recieved was was collaterized by various assets, so AIG recieved those assets in exchange. But, as Janet Tavakoli points out, you can't determine whether the swap of $10 billion cash for $10 billion in assets was an even exchange until you know what those assets were. It is very possible those were illiquid assets that were falling in value that Goldman would have not been able to recieve anywhere close to $10 billion through open market transactions.

This one might buy Greece a week, if they are lucky. FT has the details,

The International Monetary Fund is looking at raising its share of Greece’s financial rescue package by €10bn ($13.2bn) amid fears that the planned €45bn bail-out will fail to prevent the country’s debt crisis from spiralling out of control...Investors and policy specialists said that expectations of the size of the three-year package in Washington policy circles had increased to at least €70bn. The EU has so far proposed to provide €30bn and the IMF €15bn...

Jean-Claude Trichet, European Central Bank president, said a Greek default was “out of the question.” European Commission officials said debt restructuring was not under consideration in the talks in Athens between the Greek government, EU authorities and the IMF. EU officials expect eurozone governments will give final approval to their aid package in early May.

Jerzy Buzek, the former Prime Minister of Poland and current President of the European Parliament is in Washington D.C. His goal is to push for a stronger partnership between the United States and the EU.

He gave a briefing this afternoon at the National Press Club on what he would like to see. A stronger commitment to the climate and global stability, he said, was his goal.

He reported that he met with House Majority Leader Nancy Pelosi and then, separately with Secretary of State Hillary Clinton. He explained that eventually he would like to see the partnership expanded beyond just the United States. He said that among others he would like to see partnerships with were Russia, Brazil and even Saudi Arabia.

I sat there listening to this guy talk about expanding the EU partnerships to virtually the entire planet and thinking to myself, "Is this guy aware that the EU is on the verge of major crisis?"

It was Q&A time, so I asked him, "There are many people, particularly in the financial arena, who are wondering if the EU survives given the current financial crisis. The markets clearly don't believe a bailout is coming, or at least question that it will succeed. Debt of Greece, Portugal and Spain were hit hard again today. Could you comment?"

He said the bailout announced yesterday would help Greece get financing that is lower than the current market rate of 7% to 8%. I told him it didn't appear the markets believed that was going to work and that Greece short-term paper was trading near 15%, today. He then stated he wasn't familiar with the financial area.

The next question came from a reporter working for a Spanish newspaper, who asked if he feared the crisis would spread to Spain. He said no that things would be resolved.

At this point, the moderator stepped in and changed the subject. The rest of the questions were about climatology, which Buzek somehow mysteriously appeared to be much more of an expert than on EU finances. His main climatological comment was wherever he travels in the U.S. water is served with ice, which, he said, is not the case in Europe. But he was sure that much more needed to be done about the climate. Indeed, he reported that the EU is opening a climate office in the United States.

I have previously written about the great work being done by Richard Davis of the Consumer Metrics Institute. He has emailed his latest thoughts on the economy:

Recent reports of a strengthening recovery are not fully supported by the
behavior of consumers on the web. At the Consumer Metrics Institute we
measure the depth and quality of web based consumer "demand" on a daily
basis, and during this recovery the year-over-year changes in "demand" that
we measure actually peaked in August 2009 and have been declining ever
since.

In fact, our "trailing quarter" of web based consumer demand slipped into
year-over-year contraction on January 15th, and since then we have been
plotting the progress of this 2010 contraction event against the profiles of
similar events in 2006 and 2008
Click for chart.

As can see from the above chart the current consumer "demand"
contraction event is unique: if there is a "second dip" it may very well be
unlike anything we have seen recently. Instead of a "call-911" type of event
in 2008 or the "hiccup" witnessed in 2006, we may be seeing a "walking
pneumonia" type of contraction that has legs.

Over the most recent 7 quarters our economically "upstream" Daily Growth
Index has led the "downstream" factory GDP numbers by about 17 weeks. If
that pattern continues to hold, we are currently about halfway through the
consumer transactions that will drive the third quarter's production and
GDP. If the blue line shown in the above chart continues drifting laterally
over the next 40 days, the 3rd quarter 2010 GDP will look a lot like what we
have previously projected for the 2nd quarter 2010 GDP, contracting at a
mild but persistent rate.

In summary ... Even a recent upturn in our
retail index faded once the seasonal impact of the forward shifted Easter
holiday had passed. Furthermore, even during the Easter retail up-tick the
quality of the transactions was not very high. Big ticket items requiring
longer term financial commitments were relatively scarce, and for that
reason our Weighted Composite and Daily Growth Indexes did not materially
respond.

Our mission at the Consumer Metrics Institute is to measure (on a daily
basis) exactly how consumers are leading the U. S. economy. We "mine"
nation-wide internet consumer tracking databases on a daily basis for early
warnings about the demand side of the economy. Our data is significantly
upstream economically from the factories and the products measured in the
GDP, putting us far ahead of the traditional economic reports. Perhaps our
data is too timely; we are so far ahead of conventional economic measures
that our story generally differs (either positively or negatively) from the
stories being simultaneously reported by more traditional sources.

Davis' analysis is in sync with my views. Bernanke is simply not printing the money that would result in consumer buying, particularly durable goods orders, which is where Davis is picking up the most weakness. His data, I would argue, continues to support my view that the stock market remains extremely vulnerable. The data is indicative of a lack of funds flowing into the economy, which confirms the Fed data indicating that M2 money supply is not growing.This means the funds flowing into the stock market of are finite in nature, rather than funds coming fron on-going Fed printing. When the money runs out, so will be the stock market run.

It should also be noted that Davis is strictly tracking internet consumer transactions. It is not an indicator of the debt trouble developing in EU land or the debt trouble developing in a number of cities and states here in the United States.

These guys have no understanding of the business cycle and the primary role of the Federal Reserve in causing the business cycle. If they did, they would be able to turn the questions around by the Senators about whether Goldman played a role in the financial crisis.

The junk status downgrade by S&P of Greece was to BB+ from BBB+. S&P warned as part of the downgrade that bondholders could recover as little as 30%, at most 50%.,of their initial investment if the country defaults.

The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory

We believe that the government's policy options are narrowing because of Greece's weakening economic growth prospects, at a time when pressures for stronger fiscal adjustment measures are rising.

There is no way this stops with Greece. The PIIGS, Portugal, Italy, Ireland, Greece and Spain, are about to become bacon.

Senator Carl Levin just announced that it appears the Goldman brokers have a strategy to stall at the hearings and are not answering questions in a timely fashion. This was made after the most confused questions you could imagine from Senator Collins.

It's clear that Collins has no understanding as to the difference between a market maker and an investment advisor. She keeps wanting the Goldman brokers to answer a question as to whether they are operating in the best interest of their clients, as though they were investment advisers.

As market makers, they will go long or short a position for a client regardless of the market makers personal view on the direction of a market. For example, if you want to buy gold, but your broker is negative on gold, he is completing his service if he buys the gold for you. You wouldn't want him to short gold on your behalf, if you wanted to be long--even if he was bearish on gold.. Put Collins in the clueless category.

Fabrice Tourre, the broker at Goldman Sachs who has been charged by the SEC with civil fraud, will testify this morning. His opening statement is out and in the EPJ Vault, here.

Key snippet:

I deny — categorically — the SEC’s allegation. And I will defend myself in court against this false claim...First, the only two investors in this transaction, ACA and IKB, were institutions with significant resources and extensive experience in the CDO market. ACA was a specialty financial services company that, at year-end 2006, managed 22 CDOs with approximately $16 billion in assets. IKB, a large German bank, had a separate mortgage group and was an active participant in the CDO market.

According to IKB, as of January 2007, they had launched and managed more than
$16.8 billion of CLOs and CDOs and viewed securitizations and CDO investments
as an integral part of their business model... the AC-1 transaction was not designed to fail. ACA and IKB were two of the most important clients of my desk. Moreover, the securities referenced in the transaction did not underperform the other securities of that ratings class and vintage. All of the securities of that ratings class and vintage performed poorly because the subprime mortgage market suffered a broad collapse. Goldman Sachs also had no economic motive to design the AC-1 transaction to fail. Quite the contrary, we held long exposure in the transaction just like ACA and IKB. When the securities referenced in AC-1 declined in value, we lost money too. Goldman Sachs’ overall losses in connection with the transaction exceeded $100 million, including $83 million with respect to the retained long position.

German Chancellor Angela Merkel said yesterday she won’t release funds to help Greece shore up its finances until the nation has a “sustainable” plan to reduce its budget deficit. Translation: Never.

Greek Credit Default Swaps have hit a new record high at 762bps.Short-term Greek paper is almost yielding 15%.The Athens Stock Exchange Index is down 5% today and is down 22 percent this year .

Italy is now entering the crisis, stage left. Italy's 6 month bill is yielding more than basket case Spain.

“The contagion is definitely spreading and spreading quite rapidly to Portugal, Spain, Ireland and Italy,” Mehernosh Engineer, a credit strategist at BNP Paribas SA in London, wrote in a report today. “The market has been in a show-me-the-money mode for well over three months and the lack of guidance is slowly and steadily sowing the seeds of a double-dip.”

On Tuesday morning, Treasury Secretary Geithner will travel to Milwaukee, Wisconsin with Vice President Biden. At 11:30 AM CDT, Secretary Geithner will join the Vice President to chair a Middle Class Task Force meeting hosted by the University of Wisconsin–Milwaukee’s Sheldon B. Lubar School of Business. The day's propaganda will center around the Vice President and Secretary Geithner discussing "the need for Wall Street reform and the importance of reform for America’s middle class families."

Afterwards, Secretary Geithner and the Vice President will return to Washington, DC.

Monday, April 26, 2010

Lloyd Blankein's prepared opening remarks for his testimony tomorrow before the Levin Committee are out. The full text of the remarks are in the EPJ Vault, here.

Of note, Blankfein states that between 2007 and 2008 Goldman lost $1.2 billion on resedential housing securities. This falls in line with the numbers I received from a Goldman spokesman earlier today, but there is still no breakdown between trading profits and losses and writedowns.

In 2008, they showed a loss of $1.7 billion in residential related product. They wouldn't breakdown for me any further the 2008 numbers as to how much of a loss there was from writedowns and whether there was a net trading profit or loss in 2008, so basically the 2008 number Goldman is putting out at this point is pretty useless without knowing more than the net-net number they are throwing out. For example, they could have had trading profits of $ 3 billion and writedowns of $4.7 billion, for the net loss number of $1.7 billion, which is really hiding a huge trading profit number.

Some questioning tomorrow by a Senator, or two, along these lines might be enlightening.

Keep in mind this is just the first inning, Spain and Portugal are up next, followed by Italy and Ireland. Somewhere in the middle of all this the U.S. show begins with trouble for Los Angeles, Detroit, Nevada, Arizona, Florida and California for starters. Bennie doesn't have the balls to stand up to the political pressure that will demand he start bailing out cities and states. The potential inflation ahead will be mind boggling. Remarkably, right now, we are still in deflation mode. M2 is not moving and the stock market could crash at any minute. The big money will be made by those willing to step up to the plate and short the stock market, but this is not a move for babies. Then, in order to keep the money, traders will have to flip positions and go long gold. If this sounds to you like wild west trading, it is. These are wild west times with gunslingers running the country. For those more conservative, as I have been writing, it's okay to start to hunt and peck at the real estate market. Don't chase deals, but if they come to you at a fire sale price grab them.

PIMCO co-chief Mohammad El-Erian is on CNBC this afternoon talking to Maria Bartiromo.

His first point: unlike US equity investors, he is concerned about Greece, and says that if Greece isn't solved very fast, then this is a problem that will become a [big] problem soon.

He says there's nothing to feel good about until you see creditors step up to make concessions, and until some body step up to manage the bailout.

As for where he is investing client money, he's looking for quality -- so Germany and high-grade corporates.

He reiterated a point he's been making recently that Greece is Europe's subprime -- tiny, but with the potential to metastasize.

If the EU cracks, remember this is about the PIIGS, not just Greece, then a flight to German debt could occur. If there is a complete crack-up (a 20% possibility), where it becomes every EU country for itself, currency-wise, then a new German mark becomes the European gold standard of currencies. If you own the German debt, you will own the new German currency.

During a CNN interview, Treasury Secretary Timothy Geithner admits he never had "a real job." What is even more interesting is that, in a light-hearted manner, he says that many people would not even consider the period he worked for Henry Kissinger Associates as private sector work. How true, Timothy. How true.

The clip is here. You should also note that the interview is conducted by Fareed Zakaria, who just so happened to be the person who defended Goldman Sachs this morning in an WaPo Op-Ed. Zakaria's defense was correct, but it is an awfully small club, isn't it?

As per usual, Robert Reich is great at understanding a problem (The cozy relationship between parts of Wall Street and government), but terrible with his solution. His solution calls for more legislation and regulation as though new power centers won't be corrupted by the power elite, the way the old are. Further, he comes up with ways to get around the Supreme Court ruling that allows unlimited corporate giving, as though the corporates won't be able to find loopholes around any of his legislative proposals. The real solution is less legislation and regulation so that there are fewer power centers to corrupt, so the special rules for the power elite are eliminated and we all get to compete, instead of just the politically favored. Here's Reich:

Washington's relationship with Wall Street is growing more schizophrenic by the day. On the one hand, Congress is trying to show how tough it can be on the financial sector by enacting a law ostensibly designed to prevent another near-meltdown and taxpayer-supported bailout. As the midterm election looms, a staggering number of Americans remain unemployed or underemployed, and most Americans blame Wall Street (whose top bankers are raking in almost as much money as they did before the crisis). The lawsuit launched by the Securities and Exchange Commission against Goldman Sachs for alleged fraud only confirms the view held by many that the economic game is rigged.

On the other hand, both parties are going to Wall Street seeking campaign donations to fund critically important television advertising in the months ahead. After all, the Street is where the money is, and TV ads demand huge amounts of it. In recent years, the financial industry has become the second-biggest source of campaign contributions in America -- just behind the health care industry.

Even as Congress debates legislation to tame it, Wall Street is conducting a bidding war between the parties for its continued beneficence. More than 60 per cent of the $34m given by the financial industry to fund the 2010 elections has so far gone to Democrats, but since January the Street has switched its allegiance to the Republican camp. In the first quarter of this year, Citigroup, Goldman, JPMorgan Chase and Morgan Stanley donated twice as much to Republicans as to Democrats.

It is hard to bite the hands that feed you, especially when you are competing for food. The finance reform bill emerging from Senate Democrats takes a hard line in many respects - requiring that most derivatives be traded on open exchanges where buyers can see what they are getting and sellers have adequate capital, establishing an agency to protect unwary consumers from predatory lending, and giving the government authority to wind down the activities of banks that get themselves into trouble. Democrats point to these and other features as evidence of their willingness to be strict with the Street, despite their dependence on its generosity.

But the American public has no independent means of judging how tough the bill really is. Most people do not understand the intricacies of finance, and still do not know exactly what Wall Street did to bring the economy to the brink. The dependence of both parties on the financial industry for political support inevitably feeds suspicions that the bill is not nearly tough enough. Why, for example, are so-called "customized" derivatives exempted from the exchanges? Does this not create a big loophole? Why does the bill not limit the size of banks so none can again become "too big to fail"? Why is the Glass-Steagall Act - which once separated commercial from investment banking - not being fully restored? Why does the bill not separate investment banking from the private banking and wealth management activities that got Goldman into trouble?

It does not help that in recent months both parties have held at least three-dozen fundraising events with Wall Street bankers and their lobbyists. Harry Reid, the Democratic Senate majority leader, has trekked to Wall Street cup in hand, while in February and March the National Republican Senatorial Campaign Committee invited financial industry executives to pony up $10,000 each for the chance to confer with Republican senators.

Tight connections between Washington and Wall Street are nothing new, of course, especially when it comes to Goldman. Hank Paulson ran the bank before becoming George W. Bush's Treasury secretary. Robert Rubin followed the same trajectory under Bill Clinton, then returned to Wall Street to head Citigroup's executive committee. Dick Gephardt, the former Democratic House leader, lobbies for Goldman. Some 250 former members of Congress are now lobbying on behalf of the financial industry. President Barack Obama himself received nearly $15m from Wall Street during his 2008 campaign, of which almost $1m came from Goldman employees and their families.
Read the rest here.

They made a net-profit of approximately only $500 million from their residential related products trading in 2007. In 2008, they showed a loss of $1.7 billion in residential related product. They wouldn't breakdown for me any further the 2008 numbers as to how much of a loss there was from writedowns and whether there was a net trading profit or loss in 2008, so basically the 2008 number Goldman is putting out at this point is pretty useless without knowing more than the net-net number they are throwing out. For example, they could have had trading profits of $ 3 billion and writedowns of $4.7 billion, for the net loss number of $1.7 billion, which is really hiding a huge trading profit number.

The SEC investigative office has opened a probes into whether charges against Goldman Sachs were politically timed.

SEC Inspector General H. David Kotz wrote Rep. Darrell Issa (R-Calif.) on Sunday to notify Issathat he had opened an investigation, at the congressman's request, reports The Hill.

In the letter to Issa, Kotz said he would seek any documents relevant to the investigation, and would conduct interviews "of all persons with potential knowledge of the facts and circumstances regarding this matter, including those outside of the SEC."

The fate of Berkshire's effort to influence the legislation remains uncertain. Senate officials said Sunday night that most of the details of the agreement haven't yet been finalized.

The provision, sought by Berkshire and pushed by Nebraska Sen. Ben Nelson in the Senate Agriculture Committee, would largely exempt existing derivatives contracts from the proposed rules. Previously, the legislation could have allowed regulators to require that companies such as Nebraska-based Berkshire put aside large sums to cover potential losses. The change thus would aid Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.

Mr. Buffett's push is especially notable because he has warned of the potential dangers of derivatives, famously branding them "financial weapons of mass destruction."

Buffett actually has a legitimate point here, but the further point is that it takes a problem for a whale like Buffett to get legislation like this changed. If this kind of legislation simply impacted you instead of Buffett, there is no chance you would be able to get it changed.

WaPo has a short feature out today on the legal team surrounding the Goldman Sachs fraud case. The article is here and it is worthwhile reading. The team is a very sharp group of people, but they have to be in some sort of brain freeze. It's a phenomena you run into often in D.C., very bright people who are somehow in denial about the basic elements of what they are doing. They are so caught up in the bright lights, glamor and power that they simply ignore the fact that at the core of what they are doing is an obvious but very ugly truth that there is no fundamental reason they should be dong what they are doing. Whether it is promoting or carrying out some regulation that at its core is evil, or promoting legislation they know has no chance of achieving its stated goal, or bringing a court case that has no merit, they march on. At best it is a brain freeze, at worst they have sold their soul.

The Goldman Sachs fraud case is such a situation. The people identified in the WaPo story are working on a case that simply had no reason to be brought. Goldman Sachs, especially Lloyd Blankfein, are evil bastards for the way they raped America through the bailout of AIG, but the SEC case has nothing to do with that. It is a case about a trade that went down between very sophisticated financial people on all sides, who certainly had all the information they needed to analyze the security they were buying or selling.

Major players in the world of finance, and I am talking about the top players, tell me that they are yet to find any top level lawyer who thinks there is any merit to SEC's case. They are quite simply amazed that the SEC brought this case.

One player directed me to an Op-Ed by Fareed Zakaria, editor of Newsweek International. The Zakaria piece reflects the insider thinking. He wrote:

There's so much resentment toward banks these days -- some of it quite justified -- that anything resembling a defense of them is bound to anger people. But the rage surrounding the Goldman Sachs case can cloud our perspective and distort public policy. We need to step back and try to understand what happened.

Evidence may yet be presented that documents specific misrepresentations and false claims by Goldman, but much of the public debate has struck me as guided more by emotion than careful analysis. Even if some Wall Street practices seem dodgy, or unethical, that's not the same as illegal. I want financial reform, but I also want our system of governance to be characterized by fair play and equal justice -- even for people making $10 million bonuses.

There are two core claims of wrongdoing. The first is that hedge fund manager John Paulson was allowed to select the securities he wanted to bet against. This is disputed -- but in a routine hedge transaction on Wall Street somebody decides to bet against some set of stocks or securities; that person approaches a firm, which finds someone with the opposite view on those securities. This is how large companies offset the risks to their balance sheet from fluctuating currency, energy or commodity costs. Both sides examine carefully the securities involved in the wager.

The main institution that took the other side here, IKB, is a large German bank that had whole departments devoted to analyzing just these products -- departments many times larger than Paulson's firm. IKB surely knew that someone was betting against them: Otherwise, there would have been no transaction. Did IKB realize that the other party thought these securities were garbage? Yes -- disagreement over the value of stocks or securities is what creates the market.

The second charge is that Goldman Sachs designed a product it "knew" would decline in value. Dozens of transactions like this took place in 2005, 2006 and 2007. In most, the people who bet that the housing market would go up made money, and those betting it would fall lost money. These kinds of collateralized debt obligations went up in value in 2006. In fact, had this bet been made nine months earlier, Paulson would probably have lost a huge sum and IKB would have been a winner.

It's easy to say now that the housing market was doomed to go bust by 2007. But Michael Lewis documents precisely the opposite point in his recent book "The Big Short." He shows that in 2006 and even 2007, almost all the storied names in finance -- Lehman Brothers, Bear Stearns, Merrill Lynch -- were betting that the housing market would continue to rise. Only a handful of contrarians believed the opposite, and many of them had lost money for years on bets that the market would drop. At the time of the Goldman deal, Paulson was still seen as an oddball.

Whatever the new rules, one thing will not change: We can't be sure in advance which securities are "good" and which are "bad." If you doubt this, pick any asset you think is overvalued -- American stocks, Chinese real estate, Pakistani bonds -- and bet against it. Six months from now, you'll be proved a genius or a fool. Oh, and to make the bet you'll have to find someone to take the other side, so you'll need someone to handle the deal. Calling Goldman Sachs . . .

This is pretty much the case that I have been making since, a day after the charges were brought when I called SEC enforcement chief Robert Khuzami a buffoon for bringing the case. There is really no case here, unless there is the highly unlikely situation that the SEC is holding back a smoking gun.

Bottom line: Nothing new in D.C., we have a bunch of very bright people in brain freeze being controlled by a buffoon with power.

Sunday, April 25, 2010

This book is must reading for anyone who wants to understand the quant world, which means, if you are a market trader or investor, you need to read the book. It provides in depth details of the quants and how they lived and traded before, during and after the financial crisis caused their mathematical formulas to blow up in their faces.

Patterson knows how to tell a riveting story so at times the book even becomes a real page turner.

His description of how Boaz Weinstein placed a "capital structure arbitrage" trade on GM that went awry when Kirk Kerkorian started buying GM common stock, and how Weinstein handled the tense period, is worth the price of the book alone. But, this is only one tale of many.

Patterson's description of the confrontation between quant Peter Muller and skeptic Nassim Nicholas Taleb is awesome.

In short, after reading this book you will get a true sense for the big time money world of quants and how they operate. This can be of extreme value when trading for yourself.

You will also learn the Achilles heel of quants, they have no clue as to business cycle theory and they fail completely in understanding that there are no constants in the field of human action, and therefore, regardless of how long a trading mathematical program works, they fail to understand that it is subject to price activity far outside the expected range.

Patterson is silent on the topic of business cycle theory, but he does make clear in the book that Taleb's warnings about extreme price activity were spot on, and that the quants failed completely in appreciating the warning.

Hopefully, by reading this book, you will learn from the quants mistakes and not make them during your own personal trading in the years to come.